Capital regulation, liquidity risk, efficiency and banks performance in emerging economies

Abstract

Purpose This study aims to examine the descriptive capabilities of efficiency, liquidity risk and capital risk for the cross-sectional and time-series variations in banks’ performance across emerging economies (EEs). It also examines the impact of the 2008 global financial crisis (GFC) on the effects of capital, liquidity and efficiency on banks’ performance. Design/methodology/approach The paper adopts a spatial panel model and collects data across 90 EEs. Findings The study shows that a surge in efficiency and liquidity improves bank performance. In addition, banks that finance credit creation primarily with core deposits perform better. Also, banks in EEs responded to the GFC. The findings show that banks in EEs respond to global events emanating from the developed economies. This indicates that EEs banks are relatively integrated with banks in developed markets. Originality/value Improvement in profit efficiency and effective liquidity and capital risk management enhance the performance of EEs banks.

The Effect of Liquidity, Efficiency, and Overhead on Bank Profitability

“…Bank liquidity influences how banks do business [2]. Information technology helps banks to grow, especially in developing bank services to customers, increasing productivity, and managing risk [3]. Information technology contributes to bank operations.…”

“…It has the opportunity to encourage the bank to distribute it to debtors in a less selective way immediately. However, increasing nonperforming loans will reduce bank profitability [3,7]. Banks continuously strive to reduce operational costs to increase efficiency and profitability [8][9][10].…”

“…The banks need to maintain liquidity by maintaining a balance between depositors and withdrawals of depositors and creditors [14]. Banks' ability to maintain liquidity can provide a significant increase in the performance determined by profitability [3]. In addition, bank efficiency has a significant effect on bank profitability, and more efficient bank operations will encourage a decrease in bank operating costs, increasing bank profitability [3].…”

“…Banks' ability to maintain liquidity can provide a significant increase in the performance determined by profitability [3]. In addition, bank efficiency has a significant effect on bank profitability, and more efficient bank operations will encourage a decrease in bank operating costs, increasing bank profitability [3]. Banks carry out cost efficiency by maximizing output and minimizing waste in Indian banking [13].…”

“…The banking system is essential to ensure the financial stability of a country's economy. Banking has a vital role in the financial sector, such as risk management, asset management, compliance with central bank regulations, profitability management, and the stock market [3,7]. Based on the above discussion, four research objectives are as follows: first, to obtain the magnitude of the influence of liquidity on bank profitability.…”